fixed income monthly market update€¦ · equity investors seem to rejoice in the fed’s move...

© PFM 0

Fixed IncomeMonthly Market UpdateJuly 2019

PFM Asset Management LLC

213 Market StreetHarrisburg, PA 17101

717.232.2723pfm.com

Prepared by the Portfolio Strategies Group

© PFM 1

Current Market Themes The second quarter saw plunging interest rates, surging equity prices, mixed economic data and increasing global growth

concerns. While few economists expect the decade-long U.S. expansion to end soon, the Federal Reserve’s (Fed) cautionary tone set the stage for rate cuts in the second half of the year.

U.S. economic conditions are characterized by:• Solid gross domestic product (GDP) growth in Q1, but more tempered expectations for Q2 and Q3;• Strong job growth, with a low unemployment rate of 3.7%; • Softening inflation pressures; and• Increased downside risks, including a slowdown in manufacturing, weaker business investments and protracted trade

wars.

U.S. Treasury yields fell for a third consecutive quarter, reflecting expectations for Fed rate cuts and increased uncertainty about future global economic growth. The yield curve inversion deepened further, with yields on a majority of benchmark U.S. Treasury maturities now at their 18-month lows.

U.S. GDP grew 3.1% in Q1, up from 2.2% in Q4. Growth was driven by an unexpected improvement in net exports and outsized growth in inventories, factors that are not likely to be sustained. Forecasts for Q2 are substantially lower –generally in the 1.5% to 2.0% range.

At its June meeting, the Federal Open Market Committee (FOMC) left the overnight fed funds rate at a target range of 2.25%-2.50%, but acknowledged soft business investment, declining market-based inflation measures and increased uncertainty to the outlook. In subsequent communications, Fed chair Powell all but assured a first preemptive rate cut will occur at the Fed’s next meeting on July 30-31.

Equity investors seem to rejoice in the Fed’s move dovish stance, reaching new record highs. The S&P 500 returned 4.3% for Q2 and is now up 17.3% for the year – the best first half of a year since 1997.

© PFM 2

2.6%

2.4%

1.7%

Personal Consumption,

0.6%

4.2%

3.4%

2.2%

3.1%

-4%

-2%

0%

2%

4%

6%

8%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

U.S. GDP Contributors and DetractorsPersonal Consumption Fixed Investment Private Inventories Net Exports Gov't Expenditures

Q1 GDP Beats Expectations

Source: Bureau of Economic Analysis

2014 2015 2016 2017 2018 2019

The final reading for 1st quarter GDP remained unchanged at 3.1%

Personal consumption was more subdued, revised lower and posted its lowest contribution since Q1 2018.

Business investment was stronger than previously estimated, though still relatively weaker than in previous quarters

Net exports and inventorygrowth contributed strongly to GDP, but are unlikely to be sustainable.

© PFM 3

80

85

90

95

100

105

110

Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-19

NFIB Small Business Optimism

Small business optimism starting

to wane

Economic Data Somewhat Mixed

0k

100k

200k

300k

400k

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

Monthly Change in Nonfarm PayrollsNonfarm Payrolls 12-Mo Moving Avg

Source: Bloomberg, as of 6/30/2019.

30

35

40

45

50

55

60

65


ISM Manufacturing

recent trade conflicts taking a toll on the

manufacturing sector

-0.50%

0.00%

0.50%

1.00%

1.50%

May-17 Nov-17 May-18 Nov-18 May-19

Durable Goods OrdersNew Orders 12-mo MA

orders slump as business investment

slowed

Jobs gains are strong, but lower than in 2018

© PFM 4

ISM Survey Indices Slowing Sharply as Trade Wars Take a Toll


45

50

55

60

65


ISM Manufacturing

45

50

55

60

65


ISM Non-Manufacturing

© PFM 5

Inflation Running Persistently Below Target

Source: Bloomberg, CPI as of 5/31/19. PCE as of 5/31/19.

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

May-15 May-16 May-17 May-18 May-19

PCE Core PCE

Fed’s 2% Inflation Target

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

May-15 May-16 May-17 May-18 May-19

CPI Core CPI

“Core inflation unexpectedly fell… We suspect that some transitory factors may be at work.”

– Jerome Powell, Fed ChairMay 1, 2019

© PFM 6

Consumer Expectations Are Weakening

Source: Bloomberg and Conference Board, as of 05/31/2019.

-100

-75

-50

-25

0

25

50

75

100

Jun '71 Jun '75 Jun '79 Jun '83 Jun '87 Jun '91 Jun '95 Jun '99 Jun '03 Jun '07 Jun '11 Jun '15 Jun '19

Consumer Assessments of Future Expectations Minus Views on Current Conditions

Expectations - Present Situation

Consumers optimistic about the future

Consumers less optimistic about the future

© PFM 7

0100200300400500600700


Corporate Spreads1-5 Year A-AAA (OAS)

On the Other Hand, Key Market Metrics Remain Strong


8090

100110120130140150


Consumer Confidence

2018 close

still near all-time high

still tight on historical basis

new all-time high

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

Jun '18 Jul '18 Aug '18 Sep '18 Oct '18 Nov '18 Dec '18 Jan '19 Feb '19 Mar '19 Apr '19 May '19 Jun '19

S&P Price Change

2018 close

© PFM 8

Retail Sales Rebound from Weakness in Late 2018

Source (top): U.S. Census Bureau, as of 05/31/2019. Source (bottom): Bloomberg.

retail+0.5%

auto and other motor vehicles+0.7%

clothing and clothing accessories0.0%

furniture and home furnishings+0.1%

food and beverage stores-0.1%

restaurants and bars+0.7%

electronics and appliances+1.1%

1.1%0.4% 0.6%

-0.1% -0.2%

1.0%

0.0%

-1.6%

0.8%

-0.3%

1.8%

0.3% 0.5%

-2.0%

-1.0%

0.0%

1.0%

2.0%

May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19

Retail Sales

© PFM 9

0%

1%

2%

3%

4%

Fed Participants’ Assessments of ‘Appropriate’ Monetary Policy

Jun-19 FOMC Projections

Jun-19 Median

Fed Funds Futures

Market Projecting Multiple Rate Cuts by Year End

Source: Federal Reserve and Bloomberg. Individual dots represent each Fed members’ judgement of the midpoint of the appropriate target range for the federal funds rate at each year-end. Fed funds futures as of 6/19/19.

2019 2020 2021

Fed equally split between no change and expectations for

2 rate cuts

History of RecentFed Rate Hikes

Dec ’18 2.25 - 2.50%

Sept ’18 2.00 - 2.25%

Jun ’18 1.75 - 2.00%

Mar ’18 1.50 - 1.75%

Dec ’17 1.25 - 1.50%

Jun ’17 1.00 - 1.25%

Mar ’17 0.75 - 1.00%

Dec ’16 0.50 - 0.75%

Dec ’15 0.25 - 0.50%

Longer Term

Market is pricing in 3 rate cuts

by year end 2019

© PFM 10

• The Committee continues to view sustained expansion of economic activity, strong labor marketconditions, and inflation near the Committee’s symmetric 2 percent objective as the most likelyoutcomes, but uncertainties about this outlook have increased. In light of these uncertainties andmuted inflation pressures, the Committee will closely monitor the implications of incoming informationfor the economic outlook and will act as appropriate to sustain the expansion…

• In support of the Committee’s goals, the Committee decided to maintain the target range for thefederal funds rate at 2¼ to 2½ percent.

Fed Keeps Rates Steady in a Dovish Statement

Source: Federal Reserve.

• Information received since the FOMC met in May indicates that thelabor market remains strong and that economic activity is rising at amoderate rate.

• Job gains have been solid, on average, in recent months, and theunemployment rate has remained low. Although growth of householdspending appears to have picked up from earlier in the year, indicatorsof business fixed investment have been soft.

• On a 12-month basis, overall inflation and inflation for items other thanfood and energy are running below 2 percent. Market-based measuresof inflation compensation have declined; survey-based measures oflonger-term inflation expectations are little changed.

June

19

© PFM 11

The Fed’s Updated Economic Projections – June 2019

Source: Federal Reserve, as of June 2019. Green denotes an improved projection in June compared to March, red for worse.

Indicator2019 2020 2021 Longer run

Mar. Jun. Mar. Jun. Mar. Jun. Mar. Jun.

Real GDP (YoY) 2.1% 2.1% 1.9% 2.0% 1.8% 1.8% 1.9% 1.9%

Unemployment Rate 3.7% 3.6% 3.8% 3.7% 3.9% 3.8% 4.3% 4.2%

PCE Inflation (YoY) 1.8% 1.5% 2.0% 1.9% 2.0% 2.0% 2.0% 2.0%

Core PCE (YoY) 2.0% 1.8% 2.0% 1.9% 2.0% 2.0% - -

Federal FundsRate (Median) 2.4% 2.4% 2.6% 2.1% 2.6% 2.4% 2.8% 2.5%

© PFM 12

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

Federal Funds Target Rate - Midpoint

Months Between Last Hike and First Cut Months Between Last Cut and First Hike

Fed Has Historically Been Slow to Raise Rates, Quick to Cut

Source: Bloomberg, January 1989 – May 2019.

Months Between Last Rate Hike and

First Rate Cut

Months Between Last Rate Cut and

First Rate HikeMinimum 4 months 8 monthsAverage 10 months 27 monthsMaximum 18 months 85 monthsLast Cycle 15 months 85 months

© PFM 13

-20%

-10%

0%

10%

20%

Index of Leading Indicator (SA, YoY)

400600800

1,0001,2001,4001,600

Housing Starts (000s, saar)

-400

-200

0

200

400

600

Yield Curve (bps)10-year – 3-month

0100200300400500600700

Corporate Yield Spreads1-5 Year A-AAA (OAS)

3035404550556065

ISM Manufacturing

Market Indicators Weakening, But Not Yet Pointing to Imminent Recession


100k

200k

300k

400k

500k

600k

700k

Initial Jobless Claims

© PFM 14

When is the Next Recession?

2%

36%

52%

5%2% 2%

0%

10%

20%

30%

40%

50%

60%

2019 2020 2021 2022 2025 2028

Economists’ Views of When the Next Recession Will Begin

Source: Wall Street Journal, as of 5/31/19.

© PFM 15

Treasury Yields Continue to Plummet


1.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

Jun '17 Dec '17 Jun '18 Dec '18 Jun '19

2-Year Treasury

2.01%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

Jun '17 Dec '17 Jun '18 Dec '18 Jun '19

10-Year Treasury3.24%

2.97%

© PFM 16

2.09%

1.77%

2.01%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3M

1Y

2Y

3Y

4Y

5Y

10Y

30Y

Yiel

d

Maturity

June 30, 2019

December 31, 2018

September 30, 2018

Yield Curve Remains Mostly Inverted


U.S. Treasury Yield Curve

© PFM 17

Yield Environment as of June 30, 2019

Source: Bloomberg BVAL yield curves for Treasury and Corporate. 3-month corporate yields from commercial paper; A-1+ for AA and A-1 for A. Yields are for indicative purposes only; actual yields may vary by issue.

Maturity Treasury FederalAgency

AA Corporate

A Corporate

BBBCorporate

3-Month 2.09% 2.04% 2.18% 2.34% 2.57%

1-Year 1.93% 1.96% 2.15% 2.29% 2.54%

2-Year 1.75% 1.89% 2.09% 2.26% 2.55%

3-Year 1.71% 1.88% 2.09% 2.26% 2.59%

5-Year 1.77% 1.87% 2.23% 2.42% 2.82%

10-Year 2.01% 2.26% 2.68% 2.93% 3.48%

© PFM 18

Amount of Global Bonds Yielding Less Than 0% Soars to Record Levels

Source: Bloomberg, as of 6/30/19; Barclays.

$5

$6

$7

$8

$9

$10

$11

$12

$13

$14

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

Trill

ion

Negative Yielding Issues in the Bloomberg Barclays Global Bond Aggregate

Record High

© PFM 19

Strong Fixed Income Returns Year-To-Date (1-5 Year Indices)

Source: ICE BofAML Indices. MBS and ABS indices are 0-5 year, based on weighted average life.

1.52%1.71%

0.82%

1.83%

1.16%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

U.S

. Tre

asur

y

Agen

cy

Agen

cy M

BS

ABS

(AAA

)

Cor

p (A

-AAA

)

3.06%

2.56%

3.85%

2.54%

4.32%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

U.S

. Tre

asur

y

Agen

cy

Agen

cy M

BS

ABS

(AAA

)

Cor

p (A

-AAA

)

2018 Returns 2019 YTD Returns(through 6/30/2019)

© PFM 20

Falling Rates Drive Strong Treasury Returns in 2019

Source: ICE BofAML Indices.

1.45%2.44%

4.04%

5.43%

6.89%7.59%

10.85%

0-1

Year

s

1-3

Year

s

3-5

Year

s

5-7

Year

s

7-10

Yea

rs

10-1

5 Ye

ars

15+

Year

s

2018 Returns YTD Returns(through 6/30/2019)

1.92% 1.58% 1.47% 1.43%0.88%

0.14%

-1.74%

0-1

Year

s

1-3

Year

s

3-5

Year

s

5-7

Year

s

7-10

Yea

rs

10-1

5 Ye

ars

15+

Year

s

© PFM 21

Fixed-Income Index Returns

Source: ICE BofAML Indices. Returns greater than one year are annualized.

June 30, 2019 Effective Duration Yield YTD 1 Month 3 Month 1 Year 3 Years 5 Years

1-3 Year IndicesU.S. Treasury 1.82 1.81% 2.44% 0.52% 1.44% 3.96% 1.29% 1.21% Agency 1.46 1.82% 2.28% 0.42% 1.30% 3.88% 1.46% 1.33% Corp A-AAA 1.82 2.30% 3.21% 0.68% 1.54% 4.84% 2.13% 1.93% MBS (0 to 3 Years) 3.55 2.62% 3.82% 0.59% 1.59% 5.69% 2.10% 1.88% ABS (0 to 3 Years) 1.11 2.28% 2.31% 0.36% 1.20% 3.78% 1.91% 1.61%

1-5 Year IndicesU.S. Treasury 2.56 1.78% 3.06% 0.65% 1.82% 4.89% 1.31% 1.54% Agency 1.75 1.79% 2.56% 0.47% 1.44% 4.30% 1.46% 1.53% Corp A-AAA 2.58 2.36% 4.32% 0.96% 2.01% 6.06% 2.34% 2.36% MBS (0 to 5 Years) 3.17 2.57% 3.85% 0.82% 1.86% 5.56% 1.71% 2.01% ABS (0 to 5 Years) 1.36 2.29% 2.54% 0.40% 1.35% 4.10% 1.94% 1.73%

Master Indices (Maturities 1 Year and Greater)U.S. Treasury 6.56 1.94% 5.30% 0.93% 3.06% 7.33% 1.34% 2.64% Agency 3.97 1.97% 4.19% 0.71% 2.32% 6.20% 1.89% 2.34% Corp A-AAA 7.36 2.86% 8.66% 2.08% 4.04% 10.11% 3.32% 3.90% MBS (0 to 30 Years) 3.80 2.73% 4.32% 0.84% 2.01% 6.32% 2.10% 2.56% Municipals 6.75 2.13% 5.35% 0.43% 2.33% 6.73% 2.58% 3.75%

© PFM 22

Sector Our Investment Preferences Comments

C O M M E R C I A L P A P E R/ C D

• Commercial paper/negotiable CD spreads remain narrow. Short credit remains higher-yielding than some longer-dated Treasuries.

T R E A S U R I E S • Treasury Bill supply increased in March but slowed in April, putting downward pressure on rates.

• The 3-month to 10-year part of the yield curve briefly inverted in the past two months, renewing concerns about a possible recession. With a flat-to-inverted yield curve, there is little expected roll-down.

T-Bill

T-Note

F E D E R A L A G E N C I E S • Federal agency spreads remain very tight. The only value has been in certain new issue securities

• With the likelihood of Fed rate cuts, callable agencies should be avoided.

Bullets

Callables

S U P R A N A T I O N A L S • USD supply has increased modestly however spreads remain near historical tights across the curve. We continue to favor UST or GSE

C O R P O R A T E S • Corporate yield spreads have narrowed back significantly, settling in around longer-term. Spreads are near post-recession tights. While the sector is no longer “cheap”, we plan to maintain allocations.

• The corporate spread curve remains positively sloped, offering modest value for extending maturities.

Financials

Industrials

S E C U R I T I Z E D • The AAA-rated ABS sector continues to offer attractive incremental income vs. government alternatives and offers a defensive outlet to credit exposure.

• With an improving fundamental landscape, Agency MBS are an attractive alternative to other government sectors due to their incremental income potential.

Asset-Backed

Agency Mortgage-Backed

M U N I C I P A L S • Munis continue to be expensive vs. Treasuries amid limited supply.

Current outlook Outlook one month ago Negative Slightly Negative Neutral Slightly

Positive Positive

Fixed-Income Sector Outlook – July 2019

© PFM 23

Geopolitical Risks Persist Around the Globe

North Korea tensions

Russia – Ukraine tensions

Brexit, French protests, Italy’s budget woes, EU

fragmentation

Turkey currency crisis

U.S.- Iran Military

EscalationUS – Mexico border and tariff

tensions

US – China trade tensions

Venezuela political crisis

Argentina currency crisis

US – Border Security Funding

Syria - US withdrawal

Indo-Pakistani Tensions

© PFM 25

Global Growth Outlooks Revised Lower

Region 2019 2020

World 2.6% 2.7%

U.S. 1.7% 1.5%

Euro area 1.2% 1.4%

China 6.2% 6.1%

Emerging Markets 4.0% 4.6%

Region 2019 2020

World 3.3% 3.6%

U.S. 2.3% 1.9%

Euro area 1.3% 1.5%

China 6.3% 6.1%

Emerging Markets 4.4% 4.8%

“Emerging and developing economy growth is constrained by sluggish investment, and risks are

tilted to the downside. These risks include rising trade barriers, renewed financial stress, and

sharper-than-expected slowdowns in several major economies…”

-The World Bank, June 2019 Global Economic Prospects: Heightened Tensions, Subdued Investment

World Bank GDP Growth ProjectionsJune 2019

IMF GDP Growth ProjectionsApril 2019

Source: World Bank and IMF. Arrows indicate change from prior projection.

© PFM 26

American Consumer Finances Are Strong

Source: Bloomberg, and Federal Reserve’s Financial Accounts of the United States - Z.1 (2019:Q1). Consumer balance sheet includes households and nonprofit organizations. Revolving credit includes overdraft plans on checking accounts and other loans without a fixed repayment schedule. All data, except the household debt service ratio is not seasonally adjusted.

Other Financial

Assets: 39%

Pension Funds: 21%

Deposits: 11%

Other tangible: 5%

Homes: 24%

Mortgages: 66%$0

$20

$40

$60

$80

$100

$120

$140

Total Assets Total Liabilities

Trill

ions

Consumer Balance Sheet - 1Q19

Total Assets: $124.7tn.

Total Liabilities: $16.1tn.

Other non-revolving: 1% Revolving: 6%Auto loans: 7%Other liabilities: 9%Student debt: 10%

4Q07:13.2%

1Q19:9.9%

9%

10%

11%

12%

13%

14%

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

Deb

t Pay

men

ts a

s %

of

Dis

posa

ble

Pers

onal

Inco

me

Household Debt Service Ratio

$0

$20

$40

$60

$80

$100

$120

Trilli

ons

Household Net Worth

© PFM 27

$6

$7

$8

$9

$10

$11

$12

$13

$14

$15

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

16:Q

116

:Q2

16:Q

316

:Q4

17:Q

117

:Q2

17:Q

317

:Q4

18:Q

118

:Q2

18:Q

318

:Q4

19:Q

1

(trill

ions

)

Total Household Debt

Mortgage HE Revolving Auto Loan Credit Card Student Loan Other

Consumer Debt Hits New Peak; Fastest Growing Segment is Student Loans

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax, as of Q1 2019

2019 Q1 Total: $13.67 Trillion

$0.4T (+0.6%)

$1.5T (+8.3%)

$0.8T (+0.5%)

$1.3T (+6.0%)

$0.4T (-5.7%)

$9.2T (+0.3%)

(CAGR)

© PFM 28

3.0%

3.5%

4.0%

4.5%

5.0%

Jun-16 Jun-17 Jun-18 Jun-19

30 Year Fixed Rate Mortgage Average

Low Rates Spark Housing Market Rebound

Source: Bankrate.com U.S. Home Mortgage 30 Year Fixed National Average; Bloomberg, as of 6/30/19.

450k

550k

650k

750k

4.6

4.9

5.2

5.5

5.8

May-16 May-17 May-18 May-19

(mill

ions

)

Housing SalesExisting Home Sales (LT, mil.) New Home Sales (RT, thous.)

400

800

1,200

1,600

May '09 May '11 May '13 May '15 May '17 May '19

Housing Starts(000s, SAAR)

Highest Since 2007

Decreasing mortgage rates may be a boon to

the housing market.

© PFM 29

But, Future Housing Market Indicators Are More Neutral

Source: Bloomberg, as of May 2019. SAAR is the seasonally adjusted annualized rate.

400

800

1,200

1,600


Housing Starts(000s, SAAR)

400

800

1,200

1,600


Building Permits(000s, SAAR)

Highest Since 2007 Highest Since 2007

$600

$800

$1,000

$1,200

$1,400

May-09 May-11 May-13 May-15 May-17 May-19

Construction Spending(billions, SAAR)

100

120

140

160

180

200

May-09 May-11 May-13 May-15 May-17 May-19

Cum

ulat

ive

Gro

wth

Inde

x

U.S. Housing Price Index

© PFM 30

$36.0$26.9

$16.8

$79.1

$0

$20

$40

$60

$80

$100

$120

Tariffs Instituted in 2018(10%)

Add'l Tariffs Instituted in 2019(15%)

Bill

ions

U.S. Tariff Total Annual Cost to Consumers

Deadweight loss

Tax payments

Additional Tariffs on $200B of Chinese Imports Increases Costs to U.S. Consumers Tax Payments: The increased cost to the consumer that is being captured by the U.S. government

Deadweight Loss (“DWL”): The increased cost to the consumer that is lost to the U.S. economy as imports are being sourced from less efficient countries

Source: Federal Reserve Bank of New York.

+ $69.3 Billion in DWL

- $9.1 Billion in Tax Payments

© PFM 31

Trump Administration Announces New Tariffs on Mexico

A 5% tariff on all Mexican imports, including autos, auto parts, appliances, and fruits and vegetables, will be imposed in an attempt to force the U.S.’s number one trading partner to stop migrants from entering the U.S. illegally. The tariffs will go into effect June 10th and will rise as high as 25% by October 1st if the issue is not addressed.

Approximately two-thirds of U.S. imports from Mexico take place between factories owned by the same firm.

Source: Deutsche Bank Research and Wall Street Journal.

67%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Related-Party Trade Intermediate Input Trade

Share of U.S. Imports from MexicoRelated-party trade is

defined as trade within firms with at least 10% ownership

in the trading partner

© PFM 32

Commodity Prices Mixed Amid Trade Tensions


$40

$50

$60

$70

$80

Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19

WTI Crude Oil (per barrel)

$1,150

$1,200

$1,250

$1,300

$1,350

$1,400

$1,450


Gold (per oz.)

$8

$9

$10

$11


Soybeans (per bushel)

$12

$16

$20

$24

$28

$32

$36


Avocados (per 10 Kg)

© PFM 33

U.S. Federal Budget Deficit And Interest Cost Projected To Soar

Sources: Bureau of Fiscal Service, Congressional Budget Office. Data as of May 2019.

+$70B+26%

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

1990 1995 2000 2005 2010 2015 2020 2025

Bill

ions

Federal Budget Deficit

CBO Forecast

2019:-$896 B

2025:-$1,189 B

$0

$100

$200

$300

$400

$500

$600

$700

$800

1990 1995 2000 2005 2010 2015 2020 2025

Bill

ions

U.S. Treasury Annual Interest Cost

CBO Forecast

2019:$382 B

2025:$721 B

© PFM 34

The Fastest Growing Segments of Federal Spending is Net Interest

Source: Debt Management Office’s Fiscal Year 2019 Q1 Report. The boxes represent the total net marketable borrowing for that year.

$1,186 $1,164$1,097 $1,096

$963

$763 $722$657

$590 $584

60%

65%

70%

75%

80%

85%

-$600

-$400

-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

GD

P

billi

on

OMB's Projection of Borrowing from the Public

Primary deficit Net interestOther Debt held by the public (RHS)Debt held by the public net of financial assets (RHS)

© PFM 35

Disclosures

This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.

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